Our business performed well in the quarter as we continue to execute on our strategy of acquiring assets for value, enhancing the cash flows through our operating capabilities, and leveraging our capabilities to drive decarbonization across the business.
Clean energy occupies a uniquely complementary position to the global goals of low-cost energy, net-zero emissions and energy security. The wind and the sun do not need to be imported and don’t rely on substantial transport infrastructure. These underappreciated benefits will become increasingly more relevant as energy security becomes a higher priority. This represents an additional tailwind to our businesses, and together with accelerating decarbonization trends, will continue to enhance the position of investors with capital, operating capabilities, and a development pipeline to accelerate the build-out of renewables in scale.
We are seeing this trend play out within our own portfolio. One recent example is at our German utility-scale solar developer. In February, Germany’s coalition government announced an acceleration of the country’s decarbonization targets to close to 100% green power by 2035, confirming a target of 200,000 megawatts of solar capacity, up from 60,000 megawatts previously. As a result, we have injected additional capital into the business and are accelerating our business plan, including doubling the expected megawatts achieving ready-to-build status in the first two years.
With a very substantial global development pipeline, which now stands at 69,000 megawatts, we expect to see several other opportunities to pull forward development and accelerate the deployment of capital at accretive returns throughout our portfolio.
Looking forward, with decarbonization and energy security firmly established as a priority of global leaders, we are focused on the continued build-out of renewables, and the increasing demand for other decarbonization solutions, including carbon capture, green hydrogen and other energy services solutions.
Recent highlights include:
- We generated funds from operations (FFO) of $243 million or $0.38 per unit, an 18% increase on a normalized basis over the same period in 2021.
- We advanced key commercial priorities, securing contracts to deliver over 1,400 gigawatt hours of clean energy annually including 500 gigawatt hours to corporate offtakers.
- We continued to accelerate our development activities, executing on our 15,000-megawatt under-construction and advanced-stage pipeline and expanding our development pipeline to 69,000 megawatts, as well as plans to submit joint-bids with a European partner to build two 750-megawatt offshore wind projects in the upcoming Dutch subsidy-free tender process.
- We closed or agreed to invest over $1.6 billion (~$340 million net to Brookfield Renewable) of capital across multiple transaction and regions, including our first investment in carbon capture solutions.
- We are progressing on ~$560 million (~$90 million net to Brookfield Renewable) of asset recycling activities, selling non-core and mature assets at strong returns. We also continued to accelerate our financing activities, maintain our robust financial capacity with close to $4 billion of available liquidity, no material near-term maturities and limited floating rate exposure.
Update On Growth Initiatives
To date in 2022, we have invested or agreed to invest over $1.6 billion (~$340 million net to Brookfield Renewable) of capital across various investments, all of which should meet or exceed our target returns of 12-15%.
During the quarter, we closed the previously announced acquisition of both a U.S. and a German utility-scale solar development business that together have a 22,000-megawatt development pipeline in high-value markets. Since announcing these investments, we have seen strong inbound PPA demand from several high-quality buyers of clean energy, driving upside to our initial business plans.
We entered a new decarbonization asset class with our investment in a leading North American modular carbon capture solutions provider. Given the trillions of dollars required to decarbonize hard to abate industrial sectors over the coming decades, we see significant potential to grow our carbon capture footprint over time, and we believe we are well positioned to do so given our strong expertise in decarbonization and experience as an operating partner and capital provider to our global network of like-minded customers.
Our investment, through a convertible security, provides an attractive entry point into carbon capture solutions with a strong partner, a proven and cost-effective product and a sizeable development pipeline. We have committed funding of up to C$300 million for projects meeting pre-agreed return thresholds and have already begun funding the build-out of our first project. The structure of the investment provides strong downside protection, and the securities, which earn an annual coupon of 8%, are convertible into the common equity of the company at our option at any time. If 100% of our commitment is invested, which we expect given the escalating carbon price and proposed investment tax credit for carbon capture in Canada, upon conversion, we will own a majority of the common equity of the business.
Our distributed generation business continued to exceed expectations, as the trends of decentralized power generation and direct customer interaction accelerate. In fact, following the one-year anniversary of our most recent acquisition in the U.S., we are now originating several hundred megawatts of new projects annually, almost 10 times the volume prior to our ownership. Our global distributed generation operating assets have grown to over 1,500 megawatts and our development pipeline has increased to over 8,600 megawatts, including significant potential capacity to provide distributed generation solutions across Brookfield’s broader business. With our leading capabilities in North America, South America, Europe and Asia, and our ability to offer a global solution for our clients, we are well positioned to continue this strong execution.
In Asia, we agreed to acquire a 235 megawatt fully contracted wind portfolio consisting of 155 megawatts of operating and 80 megawatts of ready-to-build projects for $90 million from a large and reputable local developer that will tuck-in to our existing operations. The portfolio is part of a larger opportunity of almost 700 megawatts of operating and construction-ready projects that we have secured exclusivity on.
We made significant progress delivering our construction pipeline. We commissioned 536 megawatts of capacity and continued to advance our U.S. repowering program, including the 845-megawatt Shepherds Flat project, and our 1,200-megawatt Janauba solar development project in Brazil.
We finished the quarter with 15,000 megawatts of construction and advanced-stage projects. These projects are diversified across distributed and utility-scale solar, wind, storage, hydro and green hydrogen in 15 different countries, and in total, we expect them to contribute almost $150 million in additional annual FFO to our business once completed.
We are well protected in an inflationary environment
As central banks tighten monetary policy, markets are increasingly focused on the potential for sustained inflation in the future. We are fortunate that regardless of whether inflation is transitory or sustained, we expect our business to perform well. In fact, we see inflation as a tailwind for our operating assets given that approximately 70% of our contracts are indexed to inflation and we have a largely fixed cost structure with relatively limited exposure to rising labour costs or increasing maintenance capital expenditures. Our input costs for the sun, wind and water remain unchanged at zero. This compares to an over 50% increase in energy input costs for most alternative electricity generation over the last twelve months. Together with our almost exclusively fixed rate debt structure means the compounding effect of inflating revenue streams should drive very meaningful operating leverage across our business.
Our 15,000 megawatts of under-construction and advanced-stage assets benefit from our focus on avoiding risk. We virtually always lock in the cost of our major components when we sign revenue contracts. As a result, we believe we have matched our costs and revenues and locked in a large share of our target return. And while global supply chain disruptions continue to impact our industry, our diversified pipeline and strong relationships with suppliers mean that we are well placed to manage these issues such that they are not material to our business.
These supply chain challenges have reduced the supply of new projects, as some developers will delay or walk away from their obligations. This creates a potential upside for our business, as demand for clean energy continues to grow, increasing the value of high-quality ready-to-build projects that can meet customers’ near-term needs. We are fortunate to have many such projects in our pipeline and are seeing significant demand for their future generation in the form of higher PPA prices.
We are confident that inflation and supply chain pressures will not drive a slowdown in the adoption of clean energy globally. Elevated and volatile global energy prices continue to reinforce wind and solar’s position as the cheapest form of bulk electricity production and demonstrate the benefit of generation that is not subject to variable input costs. Across our 69,000-megawatt pipeline, which is diversified across regions and technologies, we have seen a strong willingness from the largest buyers of clean energy to absorb higher prices as the benefits of decarbonization, energy security, and price stability far outweigh the small increases in costs they are facing. Furthermore, our scale and centralized procurement function help ensure that we are a priority client for suppliers and give us operational flexibility. We are well positioned to manage inflation or supply chain pressures going forward and remain a partner of choice with the ability to deliver new projects for those looking to decarbonize.
We generated FFO of $243 million or $0.38 per unit during the quarter, reflecting solid performance. Our operations benefited from strong asset availability, higher power prices, and recent acquisitions. On a normalized basis, our per unit results were up 18% year-over-year.
With an increasingly diversified portfolio of operating assets, limited concentration risk with counterparties, and a long-term contract profile, our cash flows are highly resilient. And while generation for the quarter was in-line with long-term average, strong generation in our lower priced markets and weaker performance in our higher priced markets translated to lower-than-expected FFO. This dynamic is already normalizing, and while we expect this variability from time-to-time, we also expect to benefit from offsetting positive periods in the future. Further, we are continuously diversifying the business, which increasingly mitigates exposure to any single resource, market, or counterparty, and our variability becomes less and less every year.
During the quarter, our hydroelectric segment delivered FFO of $164 million. Hydropower continues to enhance its status as the premier renewable technology due to its perpetual nature, grid-stabilizing capabilities, and dispatchability. Growing demand for carbon-free baseload generation, in an increasingly constructive pricing environment as more intermittent renewables are added to the grid, is supporting our ability to contract these assets on a long-term basis at attractive all-in prices with built-in inflation escalation. Further, the grid-stabilizing services and storage qualities embedded in large hydros are increasingly valuable in today’s market.
And while our results benefitted from higher all-in market prices during the quarter, the impact was limited given we were largely contracted going into the year. However, throughout this year, we will have increasing amounts of hydro capacity across our fleet which will come available to benefit from these dynamics. Over the next five years, the ability to recontract almost 5,500 gigawatt hours of generation in North America should meaningfully add to our bottom line. Resetting this generation to market prices today would contribute approximately $120 million of incremental FFO, while creating incremental financing capacity, which would likely represent a highly accretive funding source for our growth.
Our wind and solar segments generated a combined $156 million of FFO. We continue to benefit from growth of these segments and the stable revenues they generate given the diversification of our fleet and highly contracted cash flows under long duration power purchase agreements.
Our distributed generation, storage & other segment generated $47 million of FFO. Our portfolio continues to grow while we assist commercial and industrial partners in achieving their decarbonization goals and provide critical grid stabilizing ancillary services and back-up capacity required to address the increasing intermittency of greener electricity grids.
Balance Sheet And Liquidity
Our financial position remains strong, with almost $4 billion of total available liquidity providing significant flexibility to fund growth.
We have continued to accelerate our financing activities, extending the term of our debt and locking in attractive interest rates. As a result, our balance sheet is in excellent shape, with an average debt duration across our portfolio of 13 years, no material near-term maturities, and less than 10% exposure to floating rate debt, almost all of which is in Brazil and Colombia where we have the benefit of full inflation escalation in our contracts.
We also continue to sell assets to drive value and fund growth. During the quarter, we signed an agreement to sell a small hydro portfolio in Brazil returning almost three times our capital over our 10-year hold period. We also met all conditions to close the sale of a number of our Mexican assets developed by our 50% owned global solar developer. This will generate ~$240 million of proceeds (~$30 million net to Brookfield Renewable) more than doubling our invested capital over our two-year hold period.
Environmental, Social and Governance (ESG)
Our business is driven by operational excellence, strong investment returns and our goals to make a positive difference for the environment, our people, and the communities in which we operate. To demonstrate our commitment, we are proud to announce in our third annual ESG report, which was published today alongside our inaugural TCFD report, our goal of achieving net zero across our existing renewables operations and to develop an additional 21,000 megawatts of new clean energy capacity, representing a doubling of our portfolio to 42,000 megawatts, by 2030.
We continue to focus on growing our business and executing on our key operational priorities, including maintaining a robust balance sheet, maintaining access to diverse sources of capital, and surfacing value through enhanced cash flows from our existing portfolio. Through this we can drive decarbonization across a large and expanding opportunity set.
We believe that with our scale, track record and global capabilities, we are well situated to partner with governments and businesses to help them achieve their goals of achieving net-zero and energy security on a low-cost basis. We believe the prospects for the growth of our business are better than they have ever been.
As always, we remain focused on delivering on our long-term total return targets. On behalf of the Board and management of Brookfield Renewable, we thank all our unitholders and shareholders for their ongoing support.
Chief Executive Officer
May 6, 2022
Cautionary Statement Regarding Forward-looking Statements
This letter to unitholders contains forward-looking statements and information within the meaning of Canadian provincial securities laws and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. The words “will”, “intend”, “should”, “could”, “target”, “growth”, “expect”, “believe”, “plan”, derivatives thereof and other expressions which are predictions of or indicate future events, trends or prospects and which do not relate to historical matters identify the above mentioned and other forward-looking statements. Forward-looking statements in this letter to unitholders include statements regarding the quality of Brookfield Renewable’s and its subsidiaries’ businesses and our expectations regarding future cash flows and distribution growth. They include statements regarding Brookfield Renewable’s anticipated financial performance, future commissioning of assets, contracted nature of our portfolio (including our ability to recontract certain asset), technology diversification, acquisition opportunities, expected completion of acquisitions and dispositions, financing and refinancing opportunities, future energy prices and demand for electricity, global decarbonization targets, economic recovery, achieving long-term average generation, project development and capital expenditure costs, energy policies, economic growth, growth potential of the renewable asset class, the future growth prospects and distribution profile of Brookfield Renewable and Brookfield Renewable’s access to capital. Although Brookfield Renewable believes that these forward-looking statements and information are based upon reasonable assumptions and expectations, you should not place undue reliance on them, or any other forward-looking statements or information in this letter to unitholders. The future performance and prospects of Brookfield Renewable are subject to a number of known and unknown risks and uncertainties. Factors that could cause actual results of Brookfield Renewable to differ materially from those contemplated or implied by the statements in this letter to unitholders include (without limitation) our inability to identify sufficient investment opportunities and complete transactions; the growth of our portfolio and our inability to realize the expected benefits of our transactions or acquisitions; weather conditions and other factors which may impact generation levels at facilities; adverse outcomes with respect to outstanding, pending or future litigation; economic conditions in the jurisdictions in which Brookfield Renewable operates; ability to sell products and services under contract or into merchant energy markets; changes to government regulations, including incentives for renewable energy; ability to complete development and capital projects on time and on budget; inability to finance operations or fund future acquisitions due to the status of the capital markets; health, safety, security or environmental incidents; regulatory risks relating to the power markets in which Brookfield Renewable operates, including relating to the regulation of our assets, licensing and litigation; risks relating to internal control environment; contract counterparties not fulfilling their obligations; changes in operating expenses, including employee wages, benefits and training, governmental and public policy changes, and other risks associated with the construction, development and operation of power generating facilities. For further information on these known and unknown risks, please see “Risk Factors” included in the Form 20-F of BEP and in the Form 20-F of BEPC and other risks and factors that are described therein.
The foregoing list of important factors that may affect future results is not exhaustive. The forward-looking statements represent our views as of the date of this letter to unitholders and should not be relied upon as representing our views as of any subsequent date. While we anticipate that subsequent events and developments may cause our views to change, we disclaim any obligation to update the forward-looking statements, other than as required by applicable law.
No securities regulatory authority has either approved or disapproved of the contents of this letter to unitholders. This letter to unitholders is for information purposes only and shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.
Cautionary Statement Regarding Use of Non-IFRS Measures
This letter to unitholders contains references to FFO, FFO per Unit, Normalized FFO and Normalized FFO per Unit, which are not generally accepted accounting measures under IFRS and therefore may differ from definitions of Adjusted EBITDA, FFO, FFO per Unit, Normalized FFO and Normalized FFO per Unit used by other entities. We believe that FFO, FFO per Unit, Normalized FFO and Normalized FFO per Unit are useful supplemental measures that may assist investors in assessing the financial performance and the cash anticipated to be generated by our operating portfolio. None of FFO, FFO per Unit, Normalized FFO and Normalized FFO per Unit should be considered as the sole measure of our performance and should not be considered in isolation from, or as a substitute for, analysis of our financial statements prepared in accordance with IFRS. For a reconciliation of FFO and FFO per Unit to the most directly comparable IFRS measure, please see “Reconciliation of Non-IFRS Measures – Three Months Ended March 31” included elsewhere herein and “Financial Performance Review on Proportionate Information – Reconciliation of Non-IFRS Measures” included in our unaudited Q1 2022 interim report. Normalized FFO assumes long-term average generation in all segments except the Brazil and Colombia hydroelectric segments and uses 2021 foreign currency rates.
References to Brookfield Renewable are to Brookfield Renewable Partners L.P. together with its subsidiary and operating entities unless the context reflects otherwise.
- Any references to capital refer to Brookfield’s cash deployed, excluding any debt financing.
- Available liquidity of $4 billion refers to “Part 5 – Liquidity and Capital Resources” in the Management Discussion and Analysis in the Q1 2022 Interim Report.
- Incremental FFO attributable to the Lievre PPA of $100 million is calculated assuming proceeds are deployed earning a 16% FFO yield, less financing costs.
- 12-15% target returns are calculated as annualized cash return on investment.